Investing In Real Estate
Investing in Real Estate is a great way to make money, but it is important to identify your goals so you can figure out what type of investment is right for you. Everyone wants to flip houses because they think there's big money there, but as always the higher the reward the higher the risk, and fixer uppers are best left to those who have some expertise on working on homes. This doesn't mean I don't think there are properties out there that can be flipped, you just have to know they require a good bit of money, and good contacts to get the jobs done. The room for error on a flip isn't usually that great, and the out of pocket cash is high so it is important to review all of the potential costs to fix the place up remebering to factor in carrying costs and the costs to buy and sell.
My favorite type of Real Estate investment is one that can benefit from some minor fixes i.e. updating the kitchen and/or bathroom, refinishing the floors, and painting, and that can then be rented out for positive cash flow. Over the years I have met many great vendors who can help you get a place looking great without having to spend a bomb. It is important when looking at rentals to calculate the total funds needed to purchase, the estimated costs to repair, and the carrying costs until you can get the place rented out. Once you have an idea of what the true getting in costs are you can review the rental rates and come up with your Return On Investment (ROI) based on your specific scenario and plans. I have a system where I calculate in the costs to fix up and carry, the expected rental rate, the expected appreciation rate, the annual taxes and insurance, association fees if applicable, maintenance costs, management fees etc. so you have a firm idea of what type of ROI you can expect based on a 5,10, or even 20 year hold. You should never use pie in the sky numbers. It is best to run your numbers on the low side so you will be pleasantly surprised and not drowning in sorrow years down the road. Being a Real Estate investor is not the same as investing in stocks as it is a job where you have to find tenants, keep the books, make repairs etc. so you don't want to purchase a place because it "feels good" only to find out 5 years down the road that it has actually cost you money.
A great plan when investing in Real Estate is to use it as your retirement plan. The right property should be able to be paid off in 15 - 20 years at which point you can pull a nice income from it without depleting the value of your investment. This is what really makes Real Estate a great investment. The right place will grow in value over the years, and will continue to do so while you are reaping a monthly income from it. There's not too many investments that can offer that. Compare this to stocks where the majority of the time you have to sell your asset to cash in. With Real Estate you receive a monthly check, and still have all of the equity.
One question I get asked by real estate investors quite often is what's the difference between buying a short sale, foreclosure and REO (bank owned property)?
A short sale is where the seller is negotiating with the bank to accept less than the bank is owned. To give an example the seller purchased the home with a $200,000 loan a few years ago, and now due to their circumstances can no longer afford to make the payments. Over those few years the condo has dropped in value to $190,000. To sell the home will cost approximately 7% so the net would be $176,700. So, the seller is trying to negotiate with the bank to accept less than they are owed rather than pursuing foreclosure. The reason the banks are willing to accept these deals is because it saves them time and money having to repossess the home and then hire an agent to sell it all while no one is looking after the home and keeping it in good repair. There are some great deals out there like this, but they require more patience and flexibility than a straightforward transaction so they are not for everybody. Banks typically take 30 - 45 days to respond to your offer, and often times the home is being sold as-is so even though you are getting a good deal you may need more money in your reserves to fix things you usually would have asked the seller to do.
A foreclosure is a home that is going to sheriff sale. There are some great foreclosure deals out there, but of course the greater the reward the greater the risk. First of all the homes are not available for tours so it is difficult to know the condition of the property before purchasing it. Since, the homes being auctioned at the sheriff sale have not been reposessed by the bank yet, often times the owners have not been evicted. You are actually at the hearing to determine what will happen with that property. About 75% or more of the time the foreclosure is stayed, or adjourned meaning it is put on hold and no decision is rendered, it is off the list, or it is purchased by the bank. The ones that do go up for auction are bid on right there and then. In Bucks County you must put up 10% of the bid price right then and there in certified check or cash and the remainder is due within 10 days, and there are no extensions. This means there is not enough time to get a mortgage on a foreclosure so you must be able to pay cash. other things to be aware of when purchasing a foreclosure is you are buying it with all liens attached. This means that there could be a second mortgage that you will acquire, or there could be mechanics liens against the home which you will be responsible for. So, it is important to run a title search on any home you are thinking about making a bid on. These typically run about $275.
A bank owned, or REO property is sold through our MLS and is a home that has already been foreclosed on and the owners have been evicted. Out of these three types of sales this is probably the safest. The reasons why are because it is available for showings so you can see what the condition is like, and because the bank usually signs off within a week of submitting your offer so you are not waiting for a month, or more like you would with a short sale.
If you are interested in finding out what Real Estate investments are out there for you give me a call, or shoot me an e-mail by using the Contact Tab at the top of the page. We can review what investments are out there, and look at what type of ROI and cash flow you should expect. As an experienced investor myself I can guide you through process and let you know what mistakes to avoid. I can also help put you in contact with some great vendors to help get your investment in the best shape to maximize your profits.
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